MANILA -- The Asian Development Bank is urging developing Asia to further improve the efficiency of its banking sector and capital markets, saying greater access to finance is essential to enhance growth and equity in the region, according to its annual report released Tuesday.
Despite a lot of progress, Asian Development Outlook 2015 says developing Asia's financial systems still lag behind advanced countries by a wide margin. Developing Asia refers to the 48 members of the Manila-based bank that are in the region.
Bank deposits, for example, equal 60 percent of regional gross domestic product, compared with an average of 110 percent among members of the Organization for Economic Cooperation and Development. Moreover, it says developing Asia's bond markets amount to less than half of gross domestic product, or about one-third of the 140 percent average in advanced economies.
"Improving the efficiency of the banking sector and capital market can boost investment, productivity, and innovation," said ADB chief economist Shang-Jin Wei.
"Reducing the dominance of state-owned financial institutions and developing local-currency bond markets are some of the important steps needed in promoting Asia's financial development," Wei said.
The report notes that boosting developing Asia's average ratio of liquid liabilities -- currency plus checking and interest-bearing accounts in financial institutions -- to GDP from about 65 to 75 percent would add almost 0.4 percentage point to average annual GDP growth per capita.
"Data shows that financial development does not necessarily lead to a reduction in income inequality," said Wei. "It is, therefore, important to also pursue financial inclusion policies (or) measures that can boost access to financial services by low-income households and small and medium-sized enterprises."
The empirical evidence in the ADB report suggests that, while financial development tends to alleviate inequality in its early stages, inclusive growth becomes more likely with concerted government efforts to improve financial inclusion.
"Because a financial crisis can both lead to a recession and generate a disproportionate amount of misery for economically disadvantaged groups, as seen during the Asian financial crisis and the more recent global financial crisis, safeguarding financial stability is important for growth and economic inclusion," the report says.
The ADB report finds that countries with better regulation of financial institutions, more foreign direct investment relative to foreign bank loans and foreign portfolio flows, and a more diversified source of international funds, are likely to be more resilient to financial shocks.
It says the most effective approach to developing the financial sector needs to take into account a country's circumstances.
"For low-income countries in Asia, further improving their banking sector's ability to mobilize domestic savings, lower the cost of credit, and improve access for households and firms may be the most important elements of financial development," the report says.
For middle-income countries, it says further developing their local currency bond market and stock market is also required in order to stimulate innovation.